Context: finance, interest rate

For a fixed interest security such as bonds and debentures, the (Macauley) duration of such a security is the present-value-weighted mean time that a cash flow will be received. It is calculated using the following formula:

D = (Σnt = 0 tCtvt) / (Σnt = 0 Ctvt),
where n is the final period in which a cash flow is received from the security, Ct is the cash flow at the time t, and vt (in actuarial notation) is the appropriate discount factor for the time period t.

Duration is used to measure interest rate risk for a particular security, i.e. the risk of a capital loss if interest rates move adversely. Securities that are sensitive to interest rate movements (and hence more risky) have a greater duration than securities that are less sensitive to interest rates.

Duration, along with its cousins modified duration and convexity, are the guiding principles in immunization of securities.

Du*ra"tion (?), n. [OF. duration. See Dure.]

The state or quality of lasting; continuance in time; the portion of time during which anything exists.

It was proposed that the duration of Parliament should be limited. Macaulay.

Soon shall have passed our own human duration. D. Webster.

 

© Webster 1913.

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